China tries to rein in bank loans - Business - International Herald Tribune

HONG KONG — China's central bank tightened monetary policy Friday night for the second time in six weeks, a sign that inflation fears are becoming global and affecting industrialized and developing countries alike.

Faced with soaring growth in bank lending, the People's Bank of China announced late Friday that it would require most banks to hold 8 percent of their assets as reserves at the central bank, up from 7.5 percent previously.

This means that banks will have a little less money available to lend for homes, office buildings, factories and other projects, which could slow economic growth slightly. "Although the consumer price index is still relatively low, if credit growth continues at a fast pace it is possible the economy will heat up and there would be a risk of inflation," the bank said in a statement.

Experts on Chinese monetary policy said that the higher reserve requirement by itself would have little effect on Chinese banks. They pointed out that the new rules would only require Chinese commercial banks to keep an extra $19 billion worth of Chinese currency with the central bank. By comparison, the banks are receiving almost all of the $18 billion to $20 billion in foreign currency flowing into China each month, and are converting that foreign currency into Chinese currency.

The new reserve requirement "is very modest," said Nicholas Lardy, a Chinese financial policy expert at the Institute for International Economics in Washington. "This will be erased in one month."

The central bank also raised its benchmark lending rate on corporate loans in April. The question now is whether the interest rate increase and now a reserve requirement increase will be enough to prevent higher inflation this year - or whether, as in the past, more drastic measures may be needed.